When does it make sense not to hedge foreign currency exposure?
- The investor has a very long time horizon and is insensitive to short and medium term returns volatility.
- The investor has a well-informed and strong conviction that the foreign currencies to which he has exposure will appreciate versus his base currency.
- The cost of implementing a currency hedge (transaction costs + interest rate differential between currencies) may be too expensive versus the expected risk contribution from unhedged currency risk. For example, this is often the case where the investor’s base currency carries a relatively low interest rate, like the Japanese Yen.
- The risk contribution from unhedged currency exposure is relatively low.
- The investor is unable to meet potential negative cashflows which may result from the currency hedge.
For more information on Overlay Asset Management’s currency hedging solutions, please contact us.